This “Sacred Cow” Retirement Rule Has Changed (Here’s What To Do)
I really hope you’re not following the antiquated “4% rule”—which says you should withdraw 4% of your nest egg (and no more!)—in retirement. Because if you are, you’re staying in the workforce way longer than you need to.
In fact, you may already be financially independent and not even know it!
Today we’re going to look at why this theory could needlessly delay your retirement (in the words of the 4% rule’s author himself!).
I’ll also show you an easy way to grab almost twice as much from your retirement nest egg in every one of your golden years—I’m talking 7% easy here—and go one step further: live on dividends alone. You could do it through just one high-yielding closed-end fund (CEF), which I’ll show you below.
The 4% Rule’s Many Traps Revealed
If you’re one of the millions of people who think you’ll never be able to retire, the 4% rule may be why. That’s because, if you wanted an income stream of $50,000 a year by following this rule, you need to save $1,250,000. This is where the financial industry’s insistence that we need a million bucks to retire comes from—and why many people simply give up.
Retirement Is Expensive With the 4% Rule
The rule’s creator, William Bengen, upped the limit to 4.5% in 2006, saying if you take that much out, you have virtually no chance of running out of money in retirement.
That means a $50,000 income stream would require $1,111,112—a savings of over $130,000. That may not sound like a big deal, but it means a worker saving $10,000 per year could retire a couple years earlier.
Even so, most advisors held to the 4% rule—even though its author no longer recommended it. Now Bengen has changed his thinking again.
“In fact, the average SAFEMAX [his term for the safe withdrawal rate] for all retirees for the years 1926 to 1990 was 7%—much higher than the ‘worst case’ scenario of 4.5%,” he wrote in Financial Advisor magazine. “It seemed to me, therefore, that it would be useful to have a method that prescribed high withdrawal rates when the right conditions existed.”
That’s a massive shift—it would let us shave seven years off our time in the workforce.
With a 7% safe withdrawal rate, you’d need $715,000 to get a $50,000 income stream—much less than $1.25 million or even $1 million.
How to Withdraw 7% Safely
For his initial calculations, Bengen used a conservative portfolio invested 30% in the S&P 500, 20% in small-cap stocks and 50% in Treasury bonds.
If we construct that portfolio using the SPDR S&P 500 ETF Trust (SPY) SPY , iShares Russell 2000 ETF (IWM) IWM and iShares 20+ Year Treasury Bond ETF (TLT) TLT , we see that it has performed well over the last 18 years, since ETFs tracking these three assets have been available.
That breaks out to a 7.3% annualized return—not bad.
But there are hundreds of CEFs that have crushed this return and given their shareholders some nice diversification, too. Take, for instance, the Liberty All-Star Growth Fund (ASG), which crushed all three of these ETFs over the same period.
The fund contracts its management out to three different companies, with each focusing on large-cap growth stocks, mid-cap growth stocks and small-cap growth stocks. Top holdings include Microsoft MSFT (MSFT), Visa V (V) and Amazon AMZN (AMZN), as well as payroll-services provider Paylocity PCTY (PCTY) and property manager FirstService Corporation (FSV).
With ASG’s 11.2% annualized return, you would have been able to take out 7% annually over this period and seen your savings grow, too.
Plus there’s the convenience of ASG’s income stream; the fund yields 6.8% today, just shy of that 7% withdrawal rate. But ASG has been quickly growing its payout over the last decade—if you’d bought 10 years ago, you’d now be getting a 13.4% yield on your original cost.
The bottom line? Forget the 4% rule—even its author thinks it’s obsolete! Now is the time to rethink retirement with a more optimistic, and realistic, goal.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Safe 8.8% Dividends.”